The Silliest Chart You'll See In The Paul Ryan Debt Plan

In order to promote his "Roadmap" for his national debt reduction
plan, Wisconsin Representative and Mitt Romney running mate Paul Ryan put out a set of
scare charts on what happens if the size of the U.S. debt
grows unchecked.

The silliest, most meaningless chart of the bunch is this one on
Who Owns The National Debt.

Paul Ryan

The message he's trying to convey is clear: More and more the
U.S. is going cap-in-hand abroad to fund government spending. The
Chinese (whom Mitt Romney has accused of not trading fairly with
us) own a huge chunk. Ergo we're at their mercy.

This is a popular notion, and a candidate running on a scare
platform is wise to tell this story, but the story is nonsense on
stilts.

China has no financial leverage over the US, and the idea of the
government having to go beg foreigners in order to spend U.S.
dollars is a myth.

The reason China owns boatloads of U.S. debt is because China
sells boatloads of goods (literally) to U.S. consumers. And then
China is left holding a bunch of U.S. dollars. And when you're
left holding a bunch of U.S. dollars, the rational place to put
those U.S. dollars is U.S. Treasuries. It really is that simple.

It's why Japan (also a huge trading partners) owns a bunch of
U.S. debt, and why Brazil (which wasn't even on the chart in
1990), is now also a sizable U.S. debt holder.

As you can see in this chart, in the '90s, the U.S. hardly had
any imports from Brazil. Now they're getting to be quite
substantial, a trend that has been a major boon to the South
American economic giant.

The essential driver of foreign ownership of U.S. debt is this
trend: The boom in global trade, the trade deficit, and the great
extent to which foreigners need to recycle a lot of U.S. dollars
that they receive.

The flipside of the U.S. situation is Japan.

Japan famously runs a trade surplus (meaning that on net there
aren't going to be a lot of Yen floating all around the world),
and so not surprisingly, its debt is almost entirely domestically
owned. Very few foreigners need to recyle Yen into JGB (Japanese
Government Bonds).

Okay, but what if China decided that after receiving U.S. dollars
in payments for various goods and services, it just didn't want
to recycle them into Treasuries. Maybe the Chinese decided it
wanted to spend those dollars directly on oil from the Mideast.

That's fine too. Then it would be Mideast dollar holders who
would recycle them into Treasuries. Eventually the dollars will
find their way home, so to speak.

And the fact of the matter is that China does reduce its Treasury
holdings from time to time.

The numbers go up and down, but it's totally irrelevant for the
U.S. Treasury market.

Of all the things to worry about, this is not one. Paul Ryan can
breathe easy.

And if you really want to get in the weeds on this issue, go
check out the paper from Professor Dan Drezner on
The Myth of China's Financial Leverage (.pdf). It looks at
how China did hope to exert influence over U.S. policy during the
financial crisis, and that it was done to no avail and no impact.